Toronto-Dominion Bank (NYSE:TD) saw how cruel April can be. In late April another Canadian bank had a Lehman Brothers-style moment, or least that’s how the press painted it.
The OSC (Ontario Securities Commission, like the SEC in the U.S.) announced it had “statements of allegations” against three of top executives in one of the country’s top non-mortgage lending institutions — Home Capital Group Inc (TSE:HCG). Within a few days, its stock price went from $22 to $6, wiping $1 billion in value off the books.
The problem was twofold. First, what the OSC had wasn’t worthy of destroying the bank, and second, it affected the entire Canadian banking sector, of which TD is one of the “Big Five.” Fueling this concern was the housing bubble that continues to inflate in Canada, Toronto especially. There are more than a few people voicing concern that their banking system may be in for a U.S.-style reckoning.
On top of that, TD was called out by Canadian news and consumer organizations for pressuring customers into accounts and services they didn’t need, much like Wells Fargo & Co (NYSE:WFC) did in the U.S. market. It wasn’t as legally questionable as what WFC undertook, but it was still jarring.
So TD’s stock slid in late April and the concerns were growing whether it had the wherewithal to make it back. People also started wondering if it wasn’t overvalued and had carried a premium that it didn’t deserve.
All those are valid concerns, but TD isn’t just a Canadian bank. It has offices in the U.S. as well, which are a great hedge on the southern side of the border. It also operates TD-Ameritrade online brokerage. And for what it’s worth, the Canadian real estate bubble in no way is similar to what happened in the U.S., Europe or China.
Fundamentally, you have a solid bank operating in two very good markets right now that is cheap and throwing off a 3.8% dividend yield. Usually TD’s price-earnings is markedly higher than its Canadian competitors, but now it’s right in line. Some of that premium has to do with its U.S. exposure, since it’s the only Canadian bank to have such a wide exposure to the U.S. markets.
Also remember that as interest rates rise, so do bank profits since they tend to hold a great deal of government bonds in reserve. And concern over customers walking away en masse because of its overly-aggressive sales tactics would be justified, but it didn’t happen to Wells Fargo and there is no evidence it will happen to TD. It would be safe to say its U.S. market is largely unaware of the scandal at all.
Simply put, this is a unique opportunity to get into TD while overblown concerns weigh on its performance. This doesn’t happen very often.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
